Last week President Trump unveiled a surprising new federal budget proposal for fiscal year 2018, which begins on October 1st. The budget was a shocker in that it proposed cutting spending in every federal agency save for Defense, Homeland Security and Veterans Affairs.

The new budget would slash Environmental Protection Agency spending by over 31% next year and cut State Department spending by over 28%, all in one fell swoop. It is by far the most conservative, smaller government budget we have seen in my adult lifetime.

Yet Mr. Trump’s new budget, with near across-the-board spending cuts, has little chance of passage in Congress. I’ll explain why as we go along today.

President Trump Unveils Controversial Federal Budget Proposal

You can usually evaluate a president’s budget proposal by the reaction from the mainstream media. The White House put out President Trump’s preliminary budget for fiscal 2018 last week, with sweeping budget cuts, and the mainstream media had a hissy-fit, to put it mildly.

If you’re a conservative, you probably get a good feeling when the mainstream media has such a negative reaction to news like Trump’s latest controversial budget proposal. While I will not adamantly defend Trump’s budget, I will put it in some statistical perspective.

Trump campaigned on a pledge to shrink the size of government. He won by a significant margin in the Electoral College where it matters. His latest budget unquestionably makes good on that promise. He proposes to cut spending for all but three government agencies.

If he gets his way with these huge budget cuts, it will mean the loss of jobs for tens of thousands of federal government workers and perhaps even more at the state and local levels. The implications are enormous.

Trump’s new cost-cutting budget is the most conservative proposal from any president in our adult lifetimes, and that includes Ronald Reagan. No wonder the mainstream media has gone apoplectic in their dramatic opposition to Trump’s new budget plan.

And why wouldn’t they? These are coveted, high-benefit government jobs we’re talking about. No wonder they’re screaming to high heaven!

Odds of Trump Getting His Budget Passed: Next to Zero

While the mainstream media and career bureaucrats know the odds of Trump getting his controversial budget cuts passed are very low, they have to speak out vocally about how bad they believe his proposals are.

At this point, let me summarize Trump’s budget cutting proposals. As noted above, Trump’s budget proposed last week is the most conservative plan I have seen since I began following politics in the mid-1970s. That virtually assures that it will never be passed by Congress.

But for sake of argument, let’s look at a graphic of Trump’s latest budget proposal showing what gets cut and what gets increased.

Trump Proposals For Government Agency Budget Changes

Let the above chart sink in. We’ve never seen anything like it. The size of the federal government grows year after year, regardless whether Republicans or Democrats control Congress and the White House.

Yet under Trump’s first budget proposal, every government agency gets a budget haircut, except for Defense, Homeland Security and Veteran’s Affairs.

These are not agency budget cuts that would be phased-in over a number of years. If passed, these cuts would be effective in-full on October 1 this year. Imagine cutting the EPA budget by over 31% on day one. The EPA Director says he will have to slash over 3,200 jobs if this budget cut is approved. The list goes on and on, as you can see above.

The reality is that President Trump’s initial limited federal budget has little to no odds of passage. This is likely Trump’s first proposal in his “The Art of the Deal” way of negotiation. He will almost certainly settle for something less dramatic. Yet his vision to dramatically cut down the size of the federal government is obvious.

A Big Picture Look at Trump’s Controversial Budget Cuts

Many Americans, and the mainstream media, of course, will look at the broad government budget cuts proposed by President Trump and conclude that they are draconian. Yet let’s put these proposed budget cuts in a much larger perspective.

To begin this discussion, we have to consider some undeniable facts and make some assumptions. Fact #1 is that our national debt is about to hit $20 trillion. Fact #2 is that this debt will continue to spiral out of control.

The federal budget deficit for fiscal year 2016 was almost $600 billion, and the Congressional Budget Office projects that the deficits will soar to over $1 trillion annually again in the next few years and stay there indefinitely.

Fact #3: We will never pay off the national debt. Period. Not going to happen. The assumption is that we will default on our debt at some point, but that is a discussion for another day.

In light of these facts, let’s put President Trump’s controversial budget proposal into a perspective that the mainstream media would never consider. Let’s start with the basics.

In fiscal year 2016, the federal government spent about $3.9 trillion. Last year, total government revenues were only about $3.3 trillion, so we ran a deficit of almost $600 billion.

Trump wants to increase the Defense Department’s budget by 10% next year, an increase of apprx. $54 billion. Sounds huge, doesn’t it? Yes, but let’s put that into perspective:

Trump’s new budget proposal would shift a mere 1.35% of that $3.9 trillion
spent to the Defense Department from other spending priorities. That’s it.

If you get nothing else from today’s E-Letter, this should be the point. The notion that Trump’s new budget is a radical and cruel restructuring/downsizing of the federal government is misguided. Why do we have to let the government get larger every year? We don’t!

Trump’s intention is to add $54 billion to the Defense Department budget and pay for it with cuts in every other government agency except for Homeland Security and Veteran’s Affairs, which would see modest increases.

And one final fact on Trump’s proposed Defense Department budget increase of 10%, before I move on. The proposal is a 10% increase over the 2018 budget cap set by the Budget Control Act of 2011. Yet it is only about 3% above what Barack Obama proposed in his final budget for fiscal year 2017. Obama agreed to a higher defense budget than he really wanted, because he wanted to neutralize the defense issue during the presidential campaign.

Assuming Trump gets his $54 billion increase, most of that money will meet urgent needs in operations and maintenance to keep aging tanks rolling, older planes flying and troops trained and moving. Put differently, that first $54 billion, if he gets it, is already spoken for.

The money it will take to meet Trump’s serious plans to significantly enlarge the military – such as his pledge to build a 350-ship Navy -- will have to start with the fiscal 2019 budget expected to be hammered out later this year.

As for cutting domestic non-entitlement programs, as illustrated in the chart above, it’s hard to argue that the federal government couldn’t survive a near across-the-board budget cut. It could, although the reductions Trump is calling for might have to be enacted over several years to avoid a recession.

The question is, would the American people even notice if the Agriculture and Labor Departments had to cut their budgets by 20%, or Commerce by 15%, as Trump proposes?

I don’t think so!

Why Trump’s Budget Will Never See the Light of Day

In the big picture, budgets offered by Modern Day presidents never make it through Congress intact. I can guarantee that a very controversial budget such as that announced by the Trump administration last week is going to go through the political meat grinder. The final budget will look nothing like the illustration above. Count on it.

There are several other reasons why Trump’s initial budget won’t see the light of day. A slew of columnists have weighed in on this question since the Trump budget was unveiled last week. I’ll summarize the prevailing thinking for you below.

The “Trump Budget” is Not Really a Budget
Trump’s so-called “skinny budget” only includes proposals for apprx. one-third of all federal spending that will occur in fiscal 2018. It does not address the other two-thirds of non-discretionary spending (Social Security, Medicare, etc.) and does not include any revenue estimates, deficit estimates and no forecasts of economic growth.

The $54 Billion Defense Hike Not Allowed by LawThe $54 billion hike that Trump wants for the Defense Department significantly exceeds the mandatory caps set by the Budget Control Act of 2011. Those budgetary caps are a matter of law and cannot simply be ignored. The Trump administration has not mentioned a plan for how to deal with this problem.

Trump’s Budget Will Need 60 Votes & Support From Dems
The only practical way to get the $54 billion defense increase that busts the caps is to get enough Democrats to come onboard to get 60 votes. I think it is plenty safe to say that no Democrats, not a single one, will vote for this budget in its current form.

In summary, the budget President Trump unveiled last week excited many smaller-government conservatives. Yet it outraged just about everyone else. As many have suggested, it was “DOA.”

It will be interesting to see if there is a Plan B.

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Hypothetical Performance August 2005 - January 2014Actual Performance February 2014 – February 2017

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IMPORTANT DISCLOSURES: Halbert Wealth Management, Inc. (HWM) and Scotia Partners, Ltd. (SPL) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from SPL in exchange for introducing client accounts. For more information on HWM or SPL, please consult Form ADV Part 2, available at no charge upon request. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As a benchmark for comparison, the Standard & Poor's 500 Stock Index (which includes dividends) was used. It represents an unmanaged, passive buy-and-hold approach, and is designed to represent a specific market. The volatility and investment characteristics of this Index may differ materially (more or less) from that of this trading program since it is an unmanaged Index which cannot be invested in directly. The performance of the S & P 500 Stock Index is not meant to imply that investors should consider an investment in this trading program, which is actively managed, as comparable to an investment in the “blue chip” stocks that comprise the S & P 500 Stock Index.

The performance from inception through January 31, 2014 is hypothetical performance provided by SPL that was constructed using the actual performance numbers of multiple strategies used in this program, assuming approximately equal initial allocations to each strategy. The amounts allocated to each strategy were rebalanced as the individual strategies move back into the cash position. The hypothetical performance was reduced by the maximum annual fee of 2.5% on the first calendar day of each quarter. From February 1, 2014 forward, the performance is from an actual account traded using the same strategy used in the hypothetical track record. The maximum fee (2.5%) was deducted from the account, though not necessarily on the first calendar day of the quarter.

This combined performance illustration through January 31, 2014 is hypothetical and not model results, and has many inherent limitations. The limitations include: 1) there are often large differences between hypothetical performance results and the actual trading results achieved by a particular program; 2) hypothetical performance results are prepared with the benefit of hindsight; 3) hypothetical results may not reflect the impact that market or economic factors might have had on the investment methods if actual money was invested; 4) hypothetical returns do not reflect the actual performance of an account and may not be indicative of the Advisors’ ability to manage money; 5) other clients may have had materially different investment results; and 6) these numbers should not be used to predict future performance.

The performance numbers provided by SPL have not been verified by HWM, and therefore HWM is not responsible for their accuracy. Statistics for “Worst Drawdown” are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Mutual funds carry their own expenses which are outlined in the fund’s prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Alpha Advantage program.

In addition, you should be aware that (i) the Alpha Advantage program is speculative and involves a high degree of risk; (ii) the Alpha Advantage program’s performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Scotia Partners, Ltd. will have trading authority over an investor’s account and the use of a single program could mean lack of diversification and consequently higher risk; and (v) the Alpha Advantage program’s fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses.

Returns illustrated are net of underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. Management fees are deducted quarterly, and are not accrued on a month-by-month basis. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. The program trades frequently and most gains or losses will be short-term in nature. No adjustment has been made for income tax liability. Consult your tax advisor. “Annualized” returns take into account compounding of earnings over the course of an investment’s actual track record. Dividends and capital gains have been reinvested. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.